This article explains how to register your new small business in the UK. We also cover why registration is important and both the benefits and responsibilities that come with registering your new company.
The different company structures
In the UK, there are a number of different ways that you can register a new business and these vary depending on the legal structure or type of business you want to register; the three most common types of business are:
- a sole trader
- a partnership
- a limited company
Each of these company structures have different legal requirements, responsibilities and benefits, so it’s important to choose the right one for your new venture.
A Sole Trader
A sole trader structure is the simplest solution for a new small business and it might be the right structure for you if you’re running the business by yourself. This might be a good solution for you if you are a freelancer, offer a trade (like decorating or plastering), or run a small online business.
Responsibilities of a sole trader
Being a sole trader means that you, personally, are responsible for any debts and losses that your company makes. If your new business venture does not work out, you will have to personally repay any debts.
As a sole trader, you’re running your business as an individual so you are effectively self-employed. You’ll need to keep a track of your sales and the costs of running your business so you can put together annual accounts. These are normally simpler than with other business structures, but they are important and are used when you complete your annual tax return.
Since you are running the business as an individual, any profit you make is yours (once you have paid any tax due to HMRC).
Lastly, as a sole trader, there are rules you will need to follow about running your business and even what you can call your new business.
How to register as a sole trader
To register as a sole trader you will need to write to HMRC to inform them that you will have self employed earnings and that you will pay tax through Self Assessment process – which will mean you will need to submit a tax return to HMRC every year.
You normally need to register as a sole trader once you have earned more than £1,000 from this employment during a tax year. Under the tax rules, you normally can have a full time job and also setup as a sole trader – perhaps you have a sideline business you run at the weekends or evenings.
Note that if you have a full time job your employment contract might not allow you to do any other work, so check that carefully and ask if you’re in doubt – many companies don’t mind so long as it’s outside your contracted hours and does not compete with your full time job.
A business partnership is a way of starting a business when there are two of you involved in the business. As a sole trader, it’s just you as an individual, with a partnership you share responsibilities with another person, your business partner.
Business partnerships are a great way for two (or more) people to setup and run a business, sharing out the responsibilities and each of you bringing your skills and expertise to make the new company a success.
The responsibilities of a partnership
When you register your business as a partnership, you nominate all the partners involved and each of you shares the legal responsibilities. So if your business makes a loss or has debts, you each share the responsibility to repay these. You are also responsible for paying the tax on your share of the partnership.
Registering as a partnership
To register a partnership, you need to contact HMRC and choose a nominated partner. The rest is similar to a sole trader setup and is very straightforward.
A Limited Company
Setting up your business as a limited company has a number of benefits, but it also brings added responsibilities and administration. The main difference between a limited company and a sole trader or partnership is that there is you are clearly and legally separating your personal assets from your business assets. This means that as a result, the company is normally responsible for any loses or debts and you own shares in the company so your personal liability is limited; normally, the most you can lose is the amount you invested in buying the shares.
How to register a limited company
To set up your business as a limited company, you have to register the new business with Companies House as well as with HMRC. Since you are setting up a whole new legal entity (your new company) there are a few more steps involved in setting up with Companies House – but there are a number of specialist companies that will help do this for you (it’s relatively cheap with prices starting at around £20); two of the bigger specialists are 1st Formtions and Companies Made Simple.
To setup your new limited company you’ll need to be ready with some additional information:
- Your company name
- Your company’s registered office address
- The name of at least one director
- The number of shares you will issue
- The name of at least one shareholder
- The nature of the business you will carry out (you choose a category from the Standard Industrial Classification (SIC) list
Once you have filled in these details, your new company also needs a legal document that describes how the company will be run and the rules the company will follow in working with its shareholder(s); this is called the Memorandum and Articles of Association and if you use one of the specialist companies to manage the process, they will automatically create this document for your company. Each shareholder needs to agree to and sign this document.
When you have completed these steps, Companies House will confirm that the new company has been setup and issue you with a unique company registration number, which you need to display on your official printed letters and website; you’ll also need this when setting up a new bank account and other financial accounts.
Now your new company has been created, it needs to register for Corporation Tax by contacting HMRC. (If you use a specialist to setup your new company, they will normally do this step for you.)
It’s worth noting that unlike a Sole Trader or Partnership, where you are personally responsible for submitting and paying tax on the company profits, for a Limited Company it is the company itself that is responsible for this process (which is why it needs to register for Corporation Tax and not Self-Assessment tax used for individuals).
What’s a registered office address?
A limited company needs to have a registered office address – this is the postal address where official letters to the company will be sent. You are unlikely to get a lot of post, but you will receive letters from the government, from HMRC and from your bank.
You could use your home address, but we would suggest that this is not a good idea since a Limited Company exists specifically to separate your personal assets from your business assets. Instead, it’s normal to use the service provided by the specialist company that setup your new company – or, if you have an office or shop or other trading address, you could use this address.
Rules on company names
When you register a new limited company, you need to have a name for your company. It’s worth doing a few checks before you start the registration process to make sure that your company name is safe to use. You can change your company name at a later date, but it’s worth getting this right from the start.
The main check is that the name is not already being used by another company or has not been used by another company that has recently stopped trading. You can search for your proposed name on the Companies House website.
Be careful about using a name that involves the word ‘royal’ or uses any trademarks – you are very likely to be contacted and asked to stop using the name.
Once you’ve found a name that works, go ahead and register – you can’t reserve a company name for future use.
In this article, we have explained how to register a business in the UK. We’ve explained the three most commonly-used company structures: a Sole Trader, a Partnership, and a Limited Company, together with the differences between each – and some important pros and cons to be aware of before you start.
As we described, the quickest and simplest way to get started is as a Sole Trader – but there are risks because you are personally responsible for all the financial and legal issues associated with the business. In contrast, a Limited Company is way of separating your personal assets from your business responsibilities, but is more complex to setup and carries its own responsibilities in running the new company.
However you decide to register your business, it’s an exciting start to your new venture and we wish you all the best with your business – let us know how you are doing!